FYI, the other (client) machine is in the same domain as the machine which hosts the app. I have gone through the Q&A on troubleshooting Negotiate authentication (link below) but still we cannot do SSO remotely.

Check the DNS configuration (Under TCP/IP settings) of your web server and see that it points to your AD DNS (probably your AD server).
If it points to e.g. your ISP DNS change it so that it points to your AD DNS. If it is already set to point to AD DNS can it actually communicate with DNS server?
Run nslookup command to see if it can resolve computer names.

Are there any firewalls or other filters between your web server and AD server?

Google has a lot more results for this error, so I would start reading that. Post what you find in this thread. Thx.